Week in Review 
For the week 5/11/2009 - 5/15/2009
Brian Trumbore
President/Editor, StocksandNews.com

Wall Street
 
I’ll admit upfront the following was rushed a bit as I scramble to complete work before I head down to the Jersey Shore and a reunion of eight guys who’ve known each other since 7th grade. We play cards and drink beer, in case you were wondering. Next week I’m attending my niece’s graduation at the University of Maryland and really not sure when the column will get done…but it will eventually, my friends. 

[How’s that for a Pulitzer Prize-winning opening?] 

Anyway, this was one of those weeks where in not just the United States but also around the globe it was two steps back and one forward (if that), as opposed to what had been the prevailing trend of two forward and one back. The bears, such as economists Nouriel Roubini and Paul Krugman, won the battle this time as there was evidence any incipient (SAT word of the week, kids) recovery could be on hold a bit longer.

To wit: 

In China, industrial production was up 7.3% in April, but this was less than expected, as was the figure on retail sales there, up 14.8% year over year but not nearly as good as we want it to be. And while urban fixed income investment rose 30.5% for the first four months, thanks to China’s stimulus program, exports were down another 22% in April… awful. Bottom line, there are some who worry China’s focus on infrastructure projects is simply another bubble in the making, especially when it’s clear many sectors of the economy already have too much capacity, and China isn’t doing enough to juice domestic demand to make up for the plunge in exports. All I can do is point to my personal experiences over there, including last November, and observe there are still a ton of needed infrastructure projects, especially away from the major cities. Meanwhile, consumer prices in China fell 1.5% in April from a year earlier 

Australia’s GDP is now projected to decline 1.5% for the June ’09 fiscal year, more than originally forecast, and now the Aussies will be dealing with record deficits thru 2016, owing to the focus on their own infrastructure spending to keep the economy going. Of course that means more ‘paper’ to be sopped up by investors, potentially at the expense of our own deficit-funding requirements, i.e., higher interest rates down the road seem inevitable. 

In Europe, GDP figures for the first quarter were atrocious, down 2.5% for the euro zone as a whole. Germany’s came in down 3.8% (over the fourth quarter…down 2.2% year over year), Italy’s declined 2.4%, France’s 1.2%, and Spain’s GDP was down 1.8%. In all cases, either multi-year or record declines since records started being kept on such measures. In the UK, unemployment hit 7.1% (it’s now 8.3% in Germany), while manufacturing declined in March, though it was better than expected. 

And thus here’s the rub. Yes, the figures for the first quarter were terrible, virtually everywhere, but beginning with the March data, we began to see news of the ‘less worse than expected’ variety that signaled a bottoming in global economic activity and, for the most part, the April data has complied. But does that spell an actual recovery, with real growth? 

Paul Krugman says a rapid recovery is “extremely unlikely” to materialize. Krugman, who has spent the week in China, said it was not clear whether their economy would truly recover, and he offered: “I’m mostly worried that the U.S. and the euro zone will have Japanese-type lost decades.” Krugman adds, “A second stimulus is becoming clearly urgent.” The bank stress tests only bought the Obama administration more time, but it’s unclear if the banks still have enough capital to fulfill their key role in the economy. Krugman and Roubini have long been calling for some of the big banks to be nationalized. 

What of the banks? The great Meredith Whitney says she wouldn’t touch them as an investment. Her big point the past few months is that the consumer is continuing to see their credit lines cut and that “credit contraction is happening at an accelerated pace.” This obviously impacts future levels of consumer spending and the banks need a strong consumer to grow out of their capital shortfalls. For now, Whitney adds, the banks are simply manufacturing earnings as they continue to sit on rotting assets. 

But, it was encouraging that post-stress tests, banks such as Wells Fargo, Bank of America, and Morgan Stanley were able to raise sizable sums of capital, not only proving that there is an appetite for risk out there, but also that credit is loosening. Even Microsoft unleashed its first debt offering, ever; some $3.75 billion in bonds with various maturities, including a 30-year piece of paper that yielded 5.20%, or about 100 basis points over the 30-year Treasury. For a AAA credit (one of the few left in the universe), not a bad investment, particularly for institutions.  

In fact, every Tom, Dick and Harry seemed to be attempting to raise capital this week as there was a flood of secondary stock offerings that mostly went off well, despite the dilution to existing shareholders. Ford raised over $1.6 billion in this manner. So there were solid signs that the capital markets were functioning, if not reasonably healthy. 

Turning to housing, the National Association of Realtors said the median sales price was down 14% in the first quarter with declines in 134 of 152 metro areas. Incredibly, the median price in the Cape Coral-Ft. Myers area is down 59% in one year, according to these folks. Realty Trac said in the month of April that there was a 32% increase in homes at risk of foreclosure from a year ago, but, only 1% from March levels. Foreclosures were actually down in Nevada in April. Some rays of sunshine filtering through the clouds, you might say. The mortgage rate on a 30-year fixed, critically, is also hanging in at the 5% level despite the move up in interest rates the past month, though that reversed somewhat this past week. 

But there has been much talk of the pending disaster on the commercial real estate front, particularly with the exposure in the regional bank community, and there is no doubt there is an issue with construction loans of all types, whether it’s office buildings, condos, or mall projects. I just don’t believe this is anywhere near as serious, for the economy as a whole, as residential real estate, which has everything to do with the wealth effect and consumer attitudes. Commercial real estate is about banks taking a hit, so you certainly want to be cautious when investing in the sector, but it’s a narrower issue, and company specific. 

As for the auto industry, the elimination of 789 Chrysler dealerships and 1,100 at General Motors makes for awful headlines and real pain, particularly in small town America, though in the case of GM, at least the dealers are remaining open for a few more weeks, pending discussions, as the company put it. What remains to be seen is what will happen with the inventory. As I write, GM said it will take theirs back. Chrysler, on the other hand, has told dealers they have to dispose of it on their own. 

GM would also appear on the brink of filing for bankruptcy, but I like what AutoNation’s Mike Jackson said on CNBC, Friday morning. As painful as this whole process has been, we are witnessing the “reinvention of the U.S. auto business.” It will emerge stronger on the other end. 

Street Bytes 

--The market’s recent winning ways hit a roadblock as shares fell across the board in the broadest decline since the first week in March when we were hitting the lows. The Dow Jones lost 3.6% to 8268, the S&P 500 lost 5.1%, and Nasdaq fell 3.4%. Nasdaq’s losses were limited a bit by news Intel’s orders were a “little better than expected,” while semi-conductor equipment maker Applied Materials said it thought demand was “rising off the bottom.” Some retailers, such as Kohl’s and J.C. Penney, offered up better than expected results, while Wal-Mart’s were in line. But no doubt, as I wrote last week we need to see some actual growth in the coming months to warrant current valuations, and to give investors cause for renewed buying. 

--U.S. Treasury Yields 

6-mo. 0.26% 2-yr. 0.85% 10-yr. 3.14% 30-yr. 4.08% 

Bonds rallied on weak economic news, as well as inflation data for April that was more or less in line. The producer price index was up 0.3%, but the core, ex-food and energy, was up just 0.1%, while the CPI was unchanged, and up 0.3% on core. Retail sales came in worse than expected, off 0.4%, while industrial production for April, down 0.5%, was slightly better than projected. 

--George Will / Washington Post, with more on President Obama’s overreaching economic policies. 

“(The) Obama administration, judging by its cavalier disregard of contracts between Chrysler and some of the lenders it sought money from, thinks contracts are written on water. The administration proposes that Chrysler’s secured creditors get 28 cents per dollar on the $7 billion in claims – and 55% of the company. This, even though the secured creditors’ contracts supposedly guaranteed them better standing than the union…. 

“Some hedge funds among Chrysler’s lenders that are not dependent were vilified by the president because they dared to resist his demand that they violate their fiduciary duties to their investors, who include individuals and institutional pension funds. 

“The Economist says the administration has ‘ridden roughshod over [creditors’] legitimate claims over the [auto companies’] assets…Bankruptcies involve dividing a shrunken pie. But not all claims are equal: some lenders provide cheaper funds to firms in return for a more secure claim over the assets should things go wrong. They rank above other stakeholders, including shareholders and employees. This principle is now being trashed.’ Tom Lauria, a lawyer representing hedge fund people trashed by the president as the cause of Chrysler’s bankruptcy, asked that his clients’ names not be published for fear of violence threatened in e-mails to them. 

“The Troubled Assets Relief Program, which has not yet been used for its supposed purpose (to purchase such assets from banks), has been the instrument of the administration’s adventure in the automobile industry. TARP’s $700 billion, like much of the supposed ‘stimulus’ money, is a slush fund the executive branch can use as it pleases. This is as lawless as it would be for Congress to say to the IRS: We need $3.5 trillion to run the government next year, so raise it however you wish – from whomever, at whatever rates you think suitable. Don’t bother us with details. 

“This is not gross, unambiguous lawlessness of the Nixonian sort – burglaries, abuse of the IRS and FBI, etc. – but it is uncomfortably close to an abuse of power that perhaps gave Nixon ideas: When in 1962 the steel industry raised prices, President John F. Kennedy had a tantrum and his administration leaked rumors that the IRS would conduct audits of steel executives, and sent FBI agents on predawn visits to the homes of journalists who covered the steel industry, ostensibly to further a legitimate investigation. 

“The Obama administration’s agenda of maximizing dependency involves political favoritism cloaked in the raiment of ‘economic planning’ and ‘social justice’ that somehow produce results superior to what markets produce when freedom allows merit to manifest itself, and incompetence to fail. The administration’s central activity – the political allocation of wealth and opportunity – is not merely susceptible to corruption, it is corruption.” 

--The European Commission slapped Intel with its largest fine ever, $1.4 billion, for anticompetitive practices. Specifically, the commission alleges that between 2002 and 2007, Intel offered conditional rebates to computer makers such as Dell and Acer that had the effect of pushing out competitors. German retailer MediaMarkt (sic), for instance, received supposedly illegal payments on the condition it exclusively sold Intel-based PCs. The big beneficiary of the move is Advanced Micro Devices, which first brought a complaint in 2000. Intel is appealing, but the EC is demanding payment in a matter of months, not years. 

--State tax collections were off a whopping 12.6% in Q1. 

--The International Energy Agency reduced its forecast for a 9th consecutive month as consumption is expected to fall the most since 1981. Simply put, the $58-$60 recent price range isn’t warranted by the fundamentals unless there is a solid recovery in the offing. By week’s end, energy stocks, which had been on a roll, pulled back as oil finished down on the week at $56.50. 

--Sony lost $1 billion for the fiscal year ending in March, its first annual net loss in 14 years, and projected it would lose even more in the current year.  

--Economist Robert J. Samuelson / Washington Post, on President Obama’s bid to close tax loopholes, including the purported “overseas tax dodge.” 

“Myth: Aided by those overpaid lobbyists, American multinationals are taxed lightly – less so than their foreign counterparts. 

“Reality: Just the opposite. Most countries don’t tax the foreign profits of their multinational firms at all. Take a Swiss multinational with operations in South Korea. It pays a 27.5% Korean corporate tax on its profits and can bring home the rest tax-free. By contrast, a U.S. firm in Korea pays the Korean tax and, if it returns the profits to the United States, faces the 35% U.S. corporate tax rate. American companies can defer the U.S. tax by keeping the profits abroad (naturally, many do), and when repatriated, companies get a credit for foreign taxes paid. In this case, they’d pay the difference between the Korean rate (27.5%) and the U.S. rate (35%). 

“Myth: When U.S. multinationals invest abroad, they destroy American jobs. 

“Reality: Not so. Sure, many U.S. firms have shut American factories and opened plants elsewhere. But most overseas investments by U.S. multinationals serve local markets. Only 10% of their foreign output is exported back to the United States, says Harvard economist Fritz Foley. When Wal-Mart opens a store in China, it doesn’t close one in California. On balance, all the extra foreign sales create U.S. jobs for management, research and development (almost 90% of American multinationals’ R&D occurs in the United States), and the export of components. A study by Foley and economists Mihir Desai of Harvard and James Hines of the University of Michigan estimates that for every 10% increase in U.S. multinationals’ overseas payrolls, their American payrolls increase almost 4%. 

“Myth: Plugging overseas corporate tax loopholes will dramatically improve the budget outlook as multinationals pay their ‘fair’ share. 

“Reality: Dream on. The estimated $210 billion revenue gain over 10 years – money already included in Obama’s budget – represents only six-tenths of 1% of the decade’s tax revenue of $32 trillion, as projected by the Congressional Budget Office. Worse, the CBO reckons that Obama’s endless deficits over the decade will total a gut-wrenching $9.3 trillion…. 

“Including state taxes, America’s top corporate tax rate exceeds 39%; among wealthy nations, only Japan’s is higher (slightly). However, the effective U.S. tax rate is reduced by preferences – mostly domestic, not foreign – that also make the system complex and expensive. As (Gary) Hufbauer suggests, Obama would have been better advised to cut the top rate and pay for it by simultaneously ending many preferences. That would lower compliance costs and involve fewer distortions. But this sort of proposal would have been harder to sell. Obama sacrificed substance for grandstanding.” 

--The Social Security trust fund is scheduled to run out of assets in 2037, four years sooner than previously forecast due to the recession and falling payroll-tax contributions. Social Security has never been the issue to yours truly, though. We can take care of this. Medicare, on the other hand, is a scary one and now it’s scheduled to run out of funds in 2017, two years earlier than projected. Of course regarding Medicare, the current health-care debate is rather critical in terms of reining in, or increasing, costs. We’ll have plenty of time to get into this in more detail over the coming weeks. 

--The SEC would appear to be ready to slap civil fraud charges against former Countrywide CEO Angelo Mozilo, including for insider trading and failure to properly disclose material information about the company’s operations. 

--According to the New York Times, $6 billion was pulled out of accounts at Bernie Madoff’s firm just three months before he was arrested last December. Another $6 billion was yanked earlier in the year. Thus far, the trustee overseeing the Madoff bankruptcy has filed two lawsuits seeking $6.1 billion. One case involves various trust funds and partnerships run by Jeffry M. Picower, a prominent Palm Beach, Fla., investor, who is accused of participating in the web of false transactions that it is alleged Madoff used to perpetuate the Ponzi scheme. As the Times reports, “In 1999, for example, one of Mr. Picower’s accounts posted an annual profit of more than 950 percent, the suit said. That account was one of two that reported annual returns from 1996 to 1999 ranging from 120 percent to more than 550 percent, the suit said.” [If you ever get cold-called and the guy on the other end says, “Mr. Porkbean, how would you like a return of 550 percent?” hang up.] 

It is not clear where the withdrawn cash is today. 

--The Washington Post reports that senior officials at the Federal Reserve Bank of New York knew of the controversial AIG bonuses five months before the issue erupted onto center stage. But the New York Fed did not raise the alarm with the Obama administration until the end of February. Timothy Geithner was head of the New York Fed at the time but his name is not mentioned in various documents obtained by the Post. Geithner has said he was “vaguely aware” of the bonus issue but did not know of the specifics. 

--Irish taxpayers are coughing up over $4.5 billion to recapitalize Allied Irish Bank following its property loan fiasco. 

--Office rents in the heavily overbuilt financial district of London are now at 1991 levels. 

[Retail rents on Fifth Avenue, New York, fell 15% last year to $1,400 a square foot on the ground floor – the highest in the world, though thanks to 40 million people a year visiting the heart of Fifth between 49th and 58th streets, deals are still getting done.] 

--Las Vegas Sands, owners of the Venetian and Sands casinos in Macau, once had 20,000 workers at the properties. By September, the headcount will be closer to 13,000. 

--Vehicle sales in Russia fell 53% in April over year ago levels. 

--Deflation Alert: Josh P. sent me a flyer from Lenovo’s site on the incredible deals it was offering on laptops, all off 8-10% from already reduced prices. We’re talking around $400 for a basic model. I remember buying my first desktop for StocksandNews ten years ago for $3,000. [The preceding is also why some believe the Intel anti-trust case is a bunch of malarkey.] 

--Inflation Alert: The Metropolitan Transportation Authority of New York approved a 10% fare increase for subways, commuter rail lines, tunnels and bridges, which was actually smaller than an initial plan to boost fares up to 30%. 

--Some companies are reporting layoffs that were basically previously announced, such as British Telecom, Sony and Nike, thus the reason why I’m not repeating them. I wish the rest of the press would do the same. It’s also why I maintain the big layoff announcements are in…and that’s a positive. 

--The New York Times ran a piece on click-fraud, a topic I first touched on at least five years ago. A subsidiary of Cars.com became a victim through clicks that came from Bulgaria, Indonesia and the Czech Republic. Years ago when I was a victim, they came from places like Uruguay. [I stopped doing click-through advertising, except on a very minimal basis, when I discovered this.] 

I’ve warned folks to stay away from pay-per-click programs, or at least watch them like a hawk, yet the Times’ Susanna Hamner reports that “marketers are wasting more money than ever.” Pay-per-click now accounts for 57% of all Internet advertising. Click Forensics has concluded that in the fourth quarter of 2008, 17% of online ad clicks were fraudulent. Google and Yahoo say they have everything under control. But at least Yahoo admitted its fraud rate was between 12% and 15%, before they hired Click Forensics. Google, on the other hand, says their fraud rate is less than 1%. Give me a freakin’ break. 

The head of an advocacy group, Jeff Chester, said, “The F.T.C. has seriously lagged in coming to grips with the problems surrounding the online ad market, specifically click fraud.” Sure has, sports fans. 

--France is set to introduce some rather strict laws against Internet piracy, parliament having voted to give the government the power to cut off offenders’ access. The draft law would create an agency to police illegal downloading of copyright material. The EU says the law is too tough and that only the courts can intervene; otherwise you are interfering in civil liberties. 

Bull. Off with their heads!  

--According to Nielsen Online, in 2008, Twitter’s retention rate – users who return the next month – was below 30%. At similar levels of Internet reach, both Facebook and MySpace had retention rates of more than 60%. 

--Say what you will about George Soros, but he did pledge $50 million to the Robin Hood Foundation, which channels money to New York-based charities, most having to do with the poor and hunger. Soros, though, said Robin Hood has to raise an additional $150 million over two years to qualify for his gift. Aside from Soros’ offering, an event the other night took in $72.7 million, the most for one day, which was encouraging given the state of the economy. 

--You can expect big changes following the National Transportation Safety Board’s hearings into the Buffalo air disaster. It’s a supreme disgrace how unqualified the pilots were, let alone all the rules that they broke. I have the transcript of the cockpit recording of the last moments on my “Wall Street History” link and will do a second piece on this in coming weeks. 

--Oracle CEO Larry Ellison is accused of engaging in international espionage with regards to the America’s Cup. Lawyers for Swiss billionaire Ernesto Bertarelli say an employee of Ellison’s BMW Oracle team was nabbed by Interpol after trying “to illegally break into facilities to take photographs and secure information” about the design of Bertarelli’s boat. Bertarelli is the current cup-holder with team Alinghi. Ellison said they all do it. Sounds like a job for Jack Bauer. Actually, Ellison kind of reminds me of some of the evil characters in ‘24.’ 

--NASCAR ticket sales are off as much as 20% at some races since the peak year of 2005. Viewership on television is down 18% over the same period. And now the Chrysler brand, made famous by Richard Petty, is obviously suffering. 

--The Senate followed the House in proposing a cash for clunkers plan that would give consumers as much as $4,500. The goal is to stabilize auto sales, particularly with all the auto dealers that will be closing up. Only vehicles getting 18 mpg or less would qualify for trade-in under the Senate plan. Republican Senator Sam Brownback said it wouldn’t add to the deficit because it uses funds already set aside for stimulating the economy, with preliminary estimates putting the cost at between $3 billion and $4 billion. Similar offerings in Germany, France and Italy have been successful. [In Germany, sales rose 21% in February.] On this one, I believe the critics are wrong. The plan needs to be tweaked, for sure, but otherwise makes perfect sense. [Plus if it’s good enough for a conservative like Brownback, it has to have some merit.] 

--The Food and Drug Administration issued a warning letter to General Mills to clean up its act with regards to the health claims being made for Cheerios, which offers it can “lower your cholesterol 4 percent in 6 weeks.” General Mills says “the science” behind the claim “is not in question.”  

It’s easy to pooh-pooh the issue and say the FDA has bigger items it should be focusing on, but at the same time, when you really look at what the FDA was talking about, the fact is Cheerios is very sloppy with its claim. 

--Domestic beer consumption in Russia declined in the first quarter for the first time since 1996. Baltika (owned by Carlsberg Group) saw its volume down 5%, while Anheuser-Busch InBev’s were off 9.3%. 

--Speaking of beer, Ken S. relayed the incredibly distressing news that the world’s leading manufacturer of beer coasters has gone bankrupt, a German outfit called the Katz Group, which, get this, controlled 97% of the U.S. coaster market. As Ken, with whom I quaffed many a beer in college, offered, “I foresee potential problems for your future back-of-the-beer-coaster calculations.” I’d add this story is yet another sign of the apocalypse, quite frankly. 

--My portfolio: As expected, my China biodiesel play reported poor earnings for the first quarter, but is optimistic on the current one while getting the new plant completed on the revised schedule. And I was stopped out of a long-held California solar holding. The stock doubled off the March lows, but I lost big, overall. I still love the company, though, and may get back in depending on its financing situation (and the economy). [The other China biodiesel play, incidentally, that I noted last time had doubled in a matter of weeks, also disappointed in its first quarter earnings and was punished. I felt like a punching bag the last few days. Just a bloody mess. Kind of like Chuck Wepner, for you boxing fans out there.] 

--Finally, we note the passing of a great man, L. William Seidman. As my friend David P. said, Seidman’s death “makes one realize how much has changed in Washington…the days of decency are long gone.” Seidman will forever be known as chairman of the FDIC from 1985 to 1991, where under his supervision the agency closed hundreds of failed banks and savings associations as a result of the S&L crisis.   Seidman was also appointed the first chairman of the Resolution Trust Corp., an entity created in ’89 to liquidate bad loans, bonds and failed real estate ventures. His candor, and humor, were legendary as he trumpeted one bad news item after another. Yet he was always warmly received and the final cost to the taxpayers, roughly $200 billion, pales in comparison to today’s still exploding tab. 

Seidman, born of Russian and Lithuanian parents in Grand Rapids, Mich., served as an ensign in the Pacific during World War II, earning a Bronze Star and 11 battle stars. In recent years, he had become more familiar to yours truly as just about the only commentator worth a damn on CNBC. But he was a vastly underutilized asset at the network. It’s sad. Yes, he was 88, but he died suddenly of complications from pneumonia. He had so much more to offer in terms of his immense wisdom during these troubled times. His family should know just how much this man was loved. 

Foreign Affairs 

Israel: Pope Benedict XVI completed his highly controversial, high-wire act in traveling to Jordan, Israel and the Palestinian territories. During the visit, Benedict criticized Israel for the security barrier that divides the West Bank and called for a loosening of restrictions in the Gaza Strip. Benedict expressed solidarity with homeless Palestinians “who long to be able to return to their birthplace.” [It was in 1948 that Palestinians were driven out.]  Bottom line, the Pope called for a two-state solution and a Palestinian homeland.  

Of course new Israeli Prime Minister Benjamin Netanyahu has not endorsed a two-state solution, preferring a three-stage process that would focus on the economy, security, and political talks, first. Netanyahu is also not interested in resurrecting talks with Syria. His positions are thus in direct conflict with the Obama administration’s, and on May 18, Netanyahu has a critical first meeting in Washington with the president. 

Separately, Netanyahu met with Egyptian President Hosni Mubarak, telling Mubarak that his top foreign policy goal is ending Iran’s nuclear program but Arab leaders want recognition of a Palestinian state as the top priority. 

But as has been the case throughout the past few decades, the Palestinians have to prove they deserve a sovereign state. Palestinian Authority leader Mahmoud Abbas, for example, was forced to postpone formation of a new government this week because members of his ruling Fatah faction threatened open revolt against him. [This bears close watching.] 

Lastly, Jordan’s King Abdullah is once again trying to play peacemaker and in a meeting with President Obama, hatched a plan whereby in July or August, the Israelis would sit down with Syria, Lebanon, and others in the region. Abdullah says that rather than talking of a two-state solution, the King is proposing a “57-state solution,” whereby the Arab and entire Muslim world would recognize the Jewish state as part of the deal. 

“We are offering a third of the world to meet them with open arms,” said Abdullah. “The future is not the Jordan River or the Golan Heights or the Sinai, the future is Morocco in the Atlantic and Indonesia in the Pacific. That is the prize.” Part of the negotiating process would be that if Israel agreed to freeze the building of further settlements in the West Bank, El Al, the Israeli airline, could be granted the right to fly over Arab air space and visas for Israeli tourists to Arab states. But Netanyahu is adamant he will not give up the Golan, an impediment for any separate peace with the Syrians. For his part, Obama is giving a critical speech to the Muslim world, from Cairo, on June 4. 

Iran: Back to Pope Benedict, Prime Minister Netanyahu called on the Pope to condemn Iranian threats to destroy his country. The Pope’s response pleased the prime minister. “He said that he condemns all instances of anti-Semitism and hate against the state of Israel – against humanity as a whole, but in this case against Israel.” 

Meanwhile, CIA chief Leon Pannetta met with Israeli leaders two weeks ago to discuss the Iranian nuclear program, we’ve just learned. Israeli leaders reportedly told Panetta that “Israel does not intend to surprise the U.S. on Iran,” according to Agence France-Presse. 

The Obama administration intends to wait until October before announcing any major changes in its Iran policy in order to see how Iran’s June elections shape out. The timing is also designed to coincide with the annual session of the U.N. General Assembly. [But it’s not inconceivable, Iran could test a device by then.] 

As for the June 12 presidential vote, Supreme Leader Ayatollah Ali Khamenei strongly hinted he was supporting Mahmoud Ahmadinejad, though he said he would not give his opinion on individuals. “Try and choose the most competent candidate,” said Khamenei. “We need to elect officials who are a man of the people, who have a modest life,” he added, which is an endorsement of Ahmadinejad any way you slice it. 

And in a mildly positive development, U.S.-born journalist Roxana Saberi was released from prison following an appeal of her eight-year jail sentence for spying, as it was reduced to a suspended two-year term. 

Lebanon: The election here is June 7 and Hizbullah could still emerge the winner. This week it admitted it was also giving “every type of support” to Palestinians in Gaza, a first-time admission, as it was also just last month that Egypt arrested what it said was a Hizbullah cell of 49 men suspected of planning attacks on Egyptian institutions and Israeli tourists. For his part, Lebanese President Michel Sleiman says the election will be extremely close, while other leaders in Lebanon are protesting that Syrian intelligence is interfering in the vote (as should be expected). 

Afghanistan: Defense Secretary Robert Gates’ decision to fire General David McKiernan, senior commander in Afghanistan, is winning major plaudits. General Stanley McChrystal, an expert on counter-insurgency warfare, is the new leader of the effort.  

Ralph Peters / New York Post 

“The conflict in Afghanistan was a special-operations war in 2001, and it’s a special operations war in 2009. Everything in between was deadly make-believe.” 

McChrystal, Peters says, is “a brilliant killer. McChrystal’s special-ops fighters, such as the Army’s Special Forces, Rangers and ‘black’ elements, or the Navy’s SEALs, do the violent, secret work that others fear or shun. Consistently, they’ve inflicted the key enemy casualties in our now-nameless struggle with terrorists.” 

Peters, however, is critical of Gen. Petraeus for thinking surge tactics, successful in Iraq, will also be successful in Afghanistan. “Afghan tribesmen just don’t share our interests. And Iraq’s a state. Afghanistan’s an accident.” 

Peters, a retired lieutenant-colonel, argues, “We need fewer troops, but a clear vision and more guts.”  

Back to Gates….

Gerald F. Seib / Wall Street Journal 

“It now appears that President Barack Obama’s shrewdest personnel move wasn’t making Timothy Geithner his Treasury secretary, or Lawrence Summers his chief economic adviser. 

“It was keeping Robert Gates, a Bush administration holdover, as secretary of defense. 

“Mr. Gates is a smart guy, tough in his own clipped manner, and an extremely crafty bureaucratic operator. All that was known before the president decided to keep him on. 

“What’s now clear is that Mr. Gates, as someone appointed to top national-security jobs by the past two Republican presidents, brought to the table a credibility that no Obama appointee would have had in making a series of difficult decisions without setting off a political firestorm.” 

Seib cites Gates’ move to endorse Obama’s decision to release the secret memos the Bush administration used to justify waterboarding; Gates’ endorsement muting Republican criticism. 

Then Gates successfully argued that the photos of prisoners under interrogation should not be released, and Obama reversed his decision. “Changing course was politically embarrassing for the president, but that problem likely pales when compared with the attacks from critics and the military itself that likely would have followed unchallenged release of the photos.” 

And because it was Gates, and not an Obama appointee, that fired McKiernan, criticism was muted on both sides, “and largely drowned out by cheers over a decisive shift in approach in Afghanistan.” 

Plus, Gates has called for a radical revamping of the Pentagon budget. 

Pakistan: Afghan President Karzai and Pakistani President Zardari were in Washington as the Obama administration realizes that as much as these two have serious limitations, they are the elected leaders of their respective countries and must be part of the conversation. For its part, Pakistan’s offensive against the Taliban in the Swat Valley continues, as in excess of 900,000 refugees have fled the region, thus creating another huge crisis for the beleaguered government. 

But is Pakistan battling the Taliban in the best means possible? By most accounts, it would appear they simply haven’t employed enough forces to adopt a ‘clear and hold’ strategy. Refugees also talk of the military using old tactics, such as helicopter gunships, aerial bombings and artillery while avoiding close combat; tactics that failed in the past. 

And in a study by the BBC, a look at the map suggests only 38% of Pakistan’s North West Frontier Province and surrounding areas is under full government control. [This is also the same region U.S. commander Gen. David Petraeus says al-Qaeda’s leaders are planning new terror attacks from.] 

Ralph Peters / New York Post 

“Yes, the Pakistani army and its paramilitary Rangers are fighting. But the key questions are ‘For how long?’ and ‘How far will they go?’ A limited operation will have limited results. The religious extremists must be destroyed if Islamabad wants a return of peace and order…. 

“It sounds impressive that Pakistan attacked the fanatics with 15,000 troops. But that’s a mere 1.5 percent of Islamabad’s defense establishment of 1 million men in the armed forces and paramilitary rangers…. 

“Would a state intent upon decisive victory limit its commitment to less than 2 percent of its forces? 

“And will the government fight on this time, until it drives the fundamentalist remnants back into their remote valleys? Or will it call off the fight again, declaring victory as the Taliban regroup?.... 

“The people who’ve tasted Taliban rule don’t want it. They want their government to protect them. If Pakistan’s government won’t, it has no justification for existing. 

“These are decisive times for Pakistan. The question is whether that miserable country’s leaders can act decisively.” 

Russia: President Obama is heading to Moscow, July 6-8, prior to the G-8 summit in Italy. Arms control will be the chief topic, so the White House hopes. 

But Russia’s leaders may have other items for the agenda. President Dmitry Medvedev told a Victory Day crowd last Saturday, “Russia’s defense is our holy duty….Any aggression against our citizens will be rightfully repelled.” Medvedev appeared to accuse Georgia of brinksmanship in last year’s war. 

“Victory over fascism is a stark lesson to all peoples. It remains acute today, when again there are those who engage in military adventurism.” 

For his part, Prime Minister Vladimir Putin lashed out at NATO’s war games in Georgia and belittled the Obama administration’s attempt to “reset” relations. 

“So, why hold military exercises there which give such a clear signal of support to the ruling regime? We consider this is movement in the opposite direction.” [Moscow Times] 

Meanwhile, Putin took a shot at Medvedev. While Putin is supposed to be in charge of the economy, and Medvedev foreign policy, Putin said: “Medvedev will look at his own political future, taking into account the interests of the country and the results of our joint work. Depending on the effectiveness of our work, myself and President Medvedev will take a decision about what we do in the future, both me and him.” Putin signaled that it was Medvedev, not he, who should take the fall if the economy doesn’t recover. And increasingly the issue is, does Medvedev run for another term, or step down per the original plan between the two, thus allowing Putin to grab another eight years in the presidency. For its part, the U.S. isn’t the only one confused by the double-headed leadership in Moscow. 

Then you have the issue of the Arctic and the vast natural resources hidden beneath the thinning ice. In a document concerning Russia’s new national security strategy, up to 2020, we read: 

“The presence and potential escalation of armed conflicts near Russia’s national borders, pending border agreements between Russia and several neighboring nations, are the major threats to Russia’s interests and border security. 

“In a competition for resources it cannot be ruled out that military force could be used to resolve emerging problems that would destroy the balance of forces near the borders of Russia and her allies.” 

Last year, Putin said: “Many conflicts, foreign policy actions and diplomatic moves smell of oil and gas. Behind all that there often is a desire to enforce an unfair competition and ensure access to our resources.” [Irish Independent] 

China: Speaking of possessions, both imagined and real, China’s foreign ministry office asserted that Beijing will not tolerate other countries claiming the disputed Spratly islands in the South China Sea. “China possesses indisputable sovereignty, sovereign rights and jurisdiction over the South China Sea islands and their near seas. China will continue protecting its maritime rights and interests based on its consistent position and stance.” 

The islands, including a group called the Parcel islands, are also claimed in full or in part by Taiwan, Vietnam, the Philippines, Malaysia and Brunei. 

On Taiwan, President Ma’s approval ratings are up to 56% as the economy shows signs of improvement, an increase from 35% in July, as well as a sign of approval of his diplomatic overtures to China.  

But not everyone is happy. The pro-independence opposition is planning a massive anti-China rally this weekend, believing Ma’s policies are threatening Taiwan’s sovereignty. 

Back to the mainland, Chinese authorities are gearing up for the 20th anniversary of the Tiananmen Square protests (massacre), by detaining some leaders of the movement. 

Burma (Myanmar): Democracy leader Aung San Suu Kyi is going to be put on trial for violating terms of her house arrest after a mysterious visit from an American last week. She faces seven years in prison under a broad public security law often used against dissidents. The American, 53-year-old John Yettaw, somehow swam across a lake and escaped the security cordon surrounding Suu Kyi’s home. There has been no explanation for his appearance, but he evidently eluded capture for a few days. He is now under arrest as well. 

North Korea: Two U.S. journalists arrested two months ago on suspicion of espionage will be tried by Pyongyang in early June. There is little doubt the women, Laura Ling and Euna Lee, will be used as bargaining chips with the Obama administration. 

Meanwhile, Pyongyang is using another bargaining chip, the joint North-South industrial complex in Kaesong, against Seoul, as the North threatens to boot out the South unless it pays its workers more. Pyongyang also wants the South to pay up on a land lease before the originally agreed to 2014 date. 

And now, after largely pooh-poohing the North’s many threats, South Korea is beginning to wonder whether the renewed production of plutonium is more than just a bargaining chip with the U.S. Some in Seoul now believe the North will aggressively pursue a program to arm its ballistic missiles with nukes by 2012 in an attempt to bolster its ailing regime, as reported by the Financial Times. One South Korean official told the paper: 

“We hope they will return to negotiations but we are also preparing for the second contingency – that they do not. A few years ago, many people thought North Korea would give up its nuclear weapons in an exchange. Now, that is not the common view.” 

[One other item. Defense News is reporting that in the battle to see who succeeds Kim Jong-il, the frontrunner may be his 26-year-old son, Kim Jong-un, who was appointed to the National Defense Council as a way of seeing how the generals would react to him. Young Kim went to school in Switzerland, however, and the generals would normally be against a ‘westernized’ young man as successor.] 

Japan: Long-time opposition leader Ichiro Ozawa resigned over a campaign-funding scandal, dealing a huge blow to the Democratic Party of Japan and its efforts to displace the Liberal Democratic Party, LDP, which has been in power in Japan for all but 10 months since 1955. Prime Minister Taro Aso’a approval rating, once in single digits, is now up to 30% ahead of an election slated for September (or sooner). 

Venezuela: In expropriating further energy assets, this time that of 60 oil service companies, President Hugo Chavez said: 

“To God what is God’s, and to Caesar what is Caesar’s.” Oh brother, what an idiot.

“Today we also say: to the people what is the people’s.” 

And so Venezuela, which receives over 90% of its export income from the oil industry, will not only suffer in terms of future production without needed foreign expertise, it obviously sends a terrible signal to any wanting to invest there in the future. 

South Africa: So I’m the guy who’s been warning that when newly-elected President Jacob Zuma comes to power, look out…major unrest. I refuse to back off this claim, even as some are praising his initial appointments, such as in the economic realm. Zuma, who was supported by the Communist Party and the trade unionists, has pledged to improve government efficiency and provide better public services. 

Jim Hoagland, an opinion writer for the Washington Post that I have long respected, had the following thoughts on the elevation of Zuma. 

“What intrigues me as someone who first visited South Africa four decades ago – at the height of white minority rule – is the astonishing success the country has become, thanks in large part to the wise leadership and generous reconciliation policies of Nelson Mandela, South Africa’s first black president.” 

What? Granted, Mandela’s reconciliation policies indeed stabilized the nation to a certain extent following his election in 1994, but I read and re-read Hoagland’s piece and there was nothing in it about what a total mess the place is today. 

So forgive me for being a bit skeptical that Jacob Zuma is soon to be a Nobel Prize winner.   But if I prove to be wrong, I’ll be the first to admit it. For now I just choose to wait 24 hours. [Plus we still have no answer to the pressing question, which of his many wives/mistresses is the real “First Lady”? Actually, that would make for a good “To Tell the Truth.” “I’m the real First Lady of South Africa.” No. 2? “I’m the First Lady of South Africa.” No. 3? “No, I’m the real First Lady of South Africa.” OK, you may now be seated. Let’s get started.] 

Sri Lanka: After rightfully not giving a damn about this place for the better part of a decade, Sri Lanka has thrust itself onto the world scene by its sudden all-out effort to win the war against the Tamil Tiger rebels, and the resultant large-scale killing of civilians. The U.N. is warning about a continuing “bloodbath” as it is estimated at least 400 civilians were killed by an artillery barrage last weekend. About 50,000 civilians are crowded into a 2.4-mile long strip of coast that is the Tamils last major stronghold. Overall, more than 70,000 have been killed since the war began in 1983. British Foreign Secretary David Miliband called the Colombo government’s actions “appalling,” and both Miliband and U.S. Secretary of State Hillary Clinton have called into question whether the Sri Lankan government deserved a $1.9 billion loan from the IMF and whether it would be used appropriately. Miliband added the current state of the conflict is “a war without witness.” 

Britain: Alas, the UK has a war of a different kind going on, a war of words in parliament and with the people as the scandal over MPs use of their expense accounts has outraged the nation. It didn’t have to be this way, but it’s yet another example of the arrogance of power. 

Consider, as the New York Times’ Sarah Lyall helpfully points out, some facts. 

“British members of Parliament earn $92,795 a year. In a recent 12-month period, they claimed an average of nearly $200,000 in expenses, a figure that included expenses related to running their offices, including staff salaries and office supplies, as well as living expenses for legislators who represent districts outside London. 

“In the United States, members of the House of Representatives make $174,000 a year. They also receive, on average, between $1.4 million and $1.9 million a year to run their offices and pay for travel to and from Washington, depending on how far away their districts are. But they are expected to pay for their own housing and living expenses.” 

Not much of a comparison, you might say, but the real issue has become the use of MPs $35,000 expense accounts for second-homes, which it has come to light some have used for chauffeurs, dog food, and, in one case, a toilet seat. 

The result is that while all parties have been swept up in the crisis, the government of Prime Minister Gordon Brown is the chief casualty. The conservative Tories now have a 43-27 lead over Brown’s Labour party [another poll has it 45-23], and Labour is preparing to be embarrassed in upcoming European parliament and local elections. 

Overall, Philip Webster of the London Times summed up the mood. 

“Parliament suffered its darkest day yesterday (Thursday) as MPs and peers were suspended for alleged misconduct and the Commons faced an exodus of shamed and demoralized Members. 

“MPs caught up in the expenses scandal admitted that they could be dropped by their local parties. Others were said by colleagues to be ready to walk away. Some who have been unaffected declared that the attractions of life as an MP had disappeared.” 

And it’s not as if parliament doesn’t have pressing issues of real import to address while all this is taking place. 

Iceland: My new friends here are preparing to vote on whether the nation will apply for EU membership, which could be fast-tracked to coincide with Croatia’s 2011 admittance. Parliament must first approve the measure, but the people would still have to give up their independence in a referendum. 

Mexico: So, you live in San Diego, or you’re attending a conference in the area, and a bunch of you are thinking, ‘Hey, let’s hop in the car and go to Tijuana for a good time.’ 

On Thursday, U.S. officials said the bodies of four Americans were found strangled, beaten and stabbed in a van near the city, two days after leaving their Southern California homes for a night at the clubs (the incident took place earlier but was just made public). The victims were 19 to 23 years old and from San Diego and Chula Vista. 

Separately, census data from the Mexican government reveals a large drop-off in the numbers emigrating to the United States, owing, of course, to the recession, though some will argue the decline is also the result of stricter law enforcement on the border.
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Pray for the men and women of our armed forces, and the fallen.

God bless America.

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Gold closed at $931
Oil, $56.60

Returns for the week 5/11-5/15 

Dow Jones  -3.6% [8268]
S&P 500  -5.0%  [882]
S&P MidCap  -7.0%
Russell 2000  -7.0%
Nasdaq  -3.4% [1680]
Returns for the period 1/1/09-5/15/09 

Dow Jones  -5.8%
S&P 500  -2.3%
S&P MidCap  +1.4%
Russell 2000  -4.7%
Nasdaq  +6.5%

Bulls 41.0
Bears 33.7 [Source: Chartcraft / Investors Intelligence]
 
Have a great week. 

Brian Trumbore

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